Pertemuan 2 - Chapter 1

Introduction to Accounting and Business
12e
PRINCIPLES OF FINANCIAL ACCOUNTING
24e
PRINCIPLES OF ACCOUNTING
Chapter 1 2e
Student Version ACCOUNTING PRINCIPLES

Using excel for Success
Prepared by: C. Douglas Cloud

Prepared
Professorby:
Emeritus
C. Douglas
of Accounting
Cloud
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Learning Objective 1
1. Describe the nature of a business, the role of

accounting, and ethics in business.
LO 1
Nature of Business and Accounting
 A business is an organization in which basic

resources (inputs), such as materials and labor,
are assembled and processed to provide goods or
services (outputs) to customers.
LO 1
Nature of Business and Accounting
 The objective of most businesses is to earn a

profit.
 Profit is the difference between the amounts
received from customers for goods or services and
the amounts paid for the inputs used to provide
the goods or services.
LO 1
The Role of Accounting in Business
 Accounting can be defined as an information

system that provides reports to users about the
economic activities and condition of a business.
LO 1
The Role of Accounting in Business
 The process by which accounting provides

information to users is as follows:
 Identify users.
 Assess users’ information needs.
 Design the accounting information system to
meet users’ needs.
 Record economic data about business activities
and events.
 Prepare accounting reports for users.
LO 1
Managerial Accounting
 The area of accounting that provides internal

users with information is called managerial
accounting or management accounting.
 Managerial accountants employed by a business
are employed in private accounting.
LO 1
Financial Accounting
 The area of accounting that provides external

users with information is called financial
accounting.
 The objective of financial accounting is to provide
relevant and timely information for the decision-
making needs of users outside of the business.
 General-purpose financial statements are one
type of financial accounting report that is
distributed to external users.
LO 1
Role of Ethics in Accounting and Business
 The objective of accounting is to provide relevant,

timely information for user decision making.
 Accountants must behave in an ethical manner so
that the information they provide users will be
trustworthy and, thus, useful for decision making.
 Ethics are moral principles that guide the conduct
of individuals.
LO 1
Opportunities for Accountants
 Accountants and their staff who provide services

on a fee basis are said to be employed in public
accounting.
 Accountants employed by a business firm or a
not-for-profit organization are said to be
employed in private accounting.
 Public accountants who have met a state’s education,
experience, and examination requirements may
become Certified Public Accountants (CPAs).

2. Summarize the development of accounting
principles and relate them to practice.
LO 2
Generally Accepted Accounting Principles
 Financial accountants follow generally accepted

accounting principles (GAAP) in preparing
reports.
 Within the U.S., the Financial Accounting
Standards Board (FASB) has the primary
responsibility for developing accounting
principles.
LO 2
Generally Accepted Accounting Principles
 The Securities and Exchange Commission (SEC),

an agency of the U.S. government, has authority
over the accounting and financial disclosures for
companies whose shares of ownership (stock) are
traded and sold to the public.
 Many countries outside the United States use
generally accepted accounting principles adopted
by the International Accounting Standards Board
(IASB).
LO 2
Business Entity Concept
 Under the business entity concept, the activities of

a business are recorded separately from the
activities of its owners, creditors, or other
businesses.
LO 2
Proprietorship
 A proprietorship is  70% of business entities in

owned by one the U.S. are
individual. proprietorships.
 They are easy and cheap to
organize.
 Resources are limited to
those of the owner.
 Used by small businesses.
LO 2
Partnership
 A partnership is  10% of business

similar to a organizations in the U.S.
proprietorship except (combined with limited
that it is owned by liability companies) are
two or more partnerships.
individuals.  Combines the skills and
resources of more than
one person.
LO 2
Corporation
 A corporation is  Corporations generate 90%

organized under state or of business revenues.
federal statutes as a  20% of the business
separate legal taxable
entity.
organizations in the U.S.
are corporations.
 Ownership is divided into
shares, called stock.
 Issues stock.
 Used by large firms.
LO 2
Limited Liability Company (LLC)
 A limited liability  10% of business

company (LLC) organizations in the U.S.
combines the (combined with
attributes of a partnerships).
partnership and a  Often used as an
corporation. alternative to a
partnership.
 Has tax and legal liability
advantages for owners.
LO 2
Accounting Concept
 Under the cost concept, amounts are initially

recorded in the accounting records at their cost
or purchase price.
LO 2
Accounting Concepts
 The objectivity concept requires that the amounts

recorded in the accounting records be based on
objective evidence.
 Only the final agreed-upon amount is objective
enough to be recorded in the accounting records.
 The unit of measure concept requires that

economic data be recorded in dollars.

3. State the accounting equation and define each
element of the equation.
LO 3
The Accounting Equation
 The resources owned by a business are its assets.

 The rights of creditors are the debts of the
business and are called liabilities.
 The rights of the owners are called owner’s
equity.
 The equation Assets = Liabilities + Owner’s
Equity is called the accounting equation.
LO 3
The Accounting Equation
Assets = Liabilities + Owner’s Equity
The resourcesThe rights ofThe rights of the

owned by creditors
a are the owners
business debts of the
business

3. State the accounting equation and define each
element of the equation.
4. Describe and illustrate how business transactions
can be recorded in terms of the resulting change
in the elements of the accounting equation.
LO 4
Business Transaction
 A business transaction is an economic event or

condition that directly changes an entity’s
financial condition or its results of operations.
LO 4
Transaction A
On November 1, 2011, Chris Clark deposited

$25,000 in a bank account in the name of
NetSolutions.
LO 4
Transaction B
On November 5, 2011, NetSolutions paid

$20,000 for the purchase of land as a future
building site.
LO 4
Transaction C
On November 10, 2011, NetSolutions purchased

supplies for $1,350 and agreed to pay the
supplier in the near future.
LO 4
Transaction C
 The liability created by a purchase on account is

called an account payable.
 Items such as supplies that will be used in the
business in the future are called prepaid expenses,
which are assets.
LO 4
Transaction D
On November 18, 2011, NetSolutions received cash of

$7,500 for providing services to customers. A business
earns money by selling goods or services to its
customers. This amount is called revenue.
LO 4
Transaction D
 Revenue from providing services is recorded as

fees earned.
 Revenue from the sale of merchandise is record
as sales.
 Other examples of revenue include rent, which is
recorded as rent revenue, and interest, which is
recorded as interest revenue.
 An account receivable is a claim against a
customer, which is an asset.
LO 4
Transaction E
During the month, NetSolutions spent cash or

used up other assets in earning revenue. Assets
used in this process of earning revenue are
called expenses.
LO 4
Transaction E
On November 30, 2011, NetSolutions paid the

following expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
LO 4
Transaction F
On November 30, 2011, NetSolutions paid

creditors on account, $950.
LO 4
Transaction G
On November 30, 2011, Chris Clark

determined that the cost of supplies on hand at
the end of the period was $550.
LO 4
Transaction H
On November 30, 2011, Chris Clark withdrew

$2,000 from NetSolutions for personal use.
1. Describe the nature of a business, the role of accounting,

and ethics in business.
2. Summarize the development of accounting principles and
relate them to practice.
3. State the accounting equation and define each element of
the equation.
4. Describe and illustrate how business transactions can be
recorded in terms of the resulting change in the elements
of the accounting equation.
5. Describe the financial statements of a proprietorship and
explain how they interrelate.
LO 5
Financial Statements
 After transactions have been recorded and

summarized, reports are prepared for users. The
accounting reports providing this information are
called financial statements.
LO 5
Income Statement
 The income statement reports the revenues and

expenses for a period of time, based on the
matching concept.
 The matching concept is applied by “matching”
the expenses incurred during a period with the
revenue that those expenses generated.
 The excess of the revenue over the expenses is
called net income, net profit, or earnings. If
expenses exceed revenue, the excess is a net loss.
LO 5
Statement of Owner’s Equity and the Balance Sheet
 The statement of owner’s equity reports the

changes in the owner’s equity for a period of time.
 It is prepared after the income statement because
the net income or net loss for the period must be
reported in this statement.
 A balance sheet is a list of the assets, liabilities,

and owner’s equity as of a specific date.
LO 5
Statement of Cash Flows
 A statement of cash flows is a summary of the

cash receipts and cash payments for a specific
period of time.
 It consists of three sections:
(1) operating activities
(2) investing activities
(3) financing activities
LO 5
Cash Flows
 The cash flows from operating activities section

reports a summary of cash receipts and cash
payments from operations.
 The cash flows from investing activities section
reports the cash transactions for the acquisition
and sale of relatively permanent assets.
 The cash flows from financing activities section

reports the cash transactions related to cash
investments by the owner, borrowings, and
withdrawals by the owner.
1. Describe the nature of a business, the role of accounting, and
ethics in business.
2. Summarize the development of accounting principles and
relate them to practice.
3. State the accounting equation and define each element of the
equation.
4. Describe and illustrate how business transactions can be
recorded in terms of the resulting change in the elements of
the accounting equation.
5. Describe the financial statements of a proprietorship and
explain how they interrelate.
6. Describe and illustrate the use of the ratio of liabilities to
owner’s equity in evaluating a company’s financial
condition.
LO 6
Ratio of Liabilities to Owner’s Equity
Ratio of Liabilities Total Liabilities

=
to Owner’s Equity Total Owner’s Equity (or Total
Stockholders’ Equity)
Ratio of Liabilities $400

= = 0.015
to Owner’s Equity $26,050
Introduction to Accounting and Business
The End
Student Version
Prepared by: C. Douglas Cloud

Professor Emeritus of Accounting
Pepperdine University

Pertemuan 2 - Chapter 1

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Introduction to Accounting and Business

PRINCIPLES OF FINANCIAL ACCOUNTING

Student Version ACCOUNTING PRINCIPLES

Prepared by: C. Douglas Cloud

1. Describe the nature of a business, the role of

 A business is an organization in which basic

 The objective of most businesses is to earn a

 Accounting can be defined as an information

 The process by which accounting provides

 The area of accounting that provides internal

 The area of accounting that provides external

 The objective of accounting is to provide relevant,

 Accountants and their staff who provide services

1. Describe the nature of a business, the role of

 Financial accountants follow generally accepted

 The Securities and Exchange Commission (SEC),

 Under the business entity concept, the activities of

 A proprietorship is  70% of business entities in

 A partnership is  10% of business

 A corporation is  Corporations generate 90%

 A limited liability  10% of business

 Under the cost concept, amounts are initially

 The objectivity concept requires that the amounts

 The unit of measure concept requires that

1. Describe the nature of a business, the role of

 The resources owned by a business are its assets.

Assets = Liabilities + Owner’s Equity

The resourcesThe rights ofThe rights of the

1. Describe the nature of a business, the role of

 A business transaction is an economic event or

On November 1, 2011, Chris Clark deposited

On November 5, 2011, NetSolutions paid

On November 10, 2011, NetSolutions purchased

 The liability created by a purchase on account is

On November 18, 2011, NetSolutions received cash of

 Revenue from providing services is recorded as

During the month, NetSolutions spent cash or

On November 30, 2011, NetSolutions paid the

On November 30, 2011, NetSolutions paid

On November 30, 2011, Chris Clark

On November 30, 2011, Chris Clark withdrew

1. Describe the nature of a business, the role of accounting,

 After transactions have been recorded and

 The income statement reports the revenues and

 The statement of owner’s equity reports the

 A balance sheet is a list of the assets, liabilities,

 A statement of cash flows is a summary of the

 The cash flows from operating activities section

 The cash flows from financing activities section

Ratio of Liabilities Total Liabilities

Ratio of Liabilities $400

Prepared by: C. Douglas Cloud

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